Appendix 14: Small business entities

This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

Small businesses with an aggregated turnover of less than $2 million are called small business entities and may qualify for a range of tax concessions.

Eligible businesses can choose to use the concessions that best suit their needs. It is not necessary to elect to be a small business entity each year to access the concessions - however, eligibility must be reviewed each year.

A small business entity may be eligible for the following concessions:

Eligibility

The trust will be a small business entity if it is carrying on a business and has an aggregated turnover of less than $2 million - this is known as the small business entity test.

'Business' is defined broadly to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. 'Carrying on a business' is not defined in the tax law, and so takes its ordinary meaning. An entity is taken to be carrying on a business for the purposes of the small business entity test in an income year if:

the entity is winding up a business it formerly carried on, and

it was a small business entity in the income year that it stopped carrying on the business.

Aggregated turnover is the annual turnover of the trust, plus the annual turnovers of any entities that are connected with it or that are its affiliate.

For more information on calculating aggregated turnover including the meaning of 'connected with' or 'affiliated with' the trust, see Small business entity concessions.

Eligibility must be reviewed each year.

Calculating turnover

Turnover includes all ordinary income the trust earned in the ordinary course of business for the income year. The following are some examples of amounts included and not included in ordinary income:

Table 14.1: Ordinary income

Include these amounts:

Do not include these amounts:

sales of trading stock

fees for services provided

interest from business bank accounts

amounts received to replace something that would have had the character of business income - for example, a payment for loss of earnings.

GST the trust has charged on a transaction

amounts borrowed for the business

proceeds from the sale of business capital assets

insurance proceeds for the loss or destruction of a business asset

amounts received from repayments of farm management deposits.

There are special rules for calculating the annual turnover if the trust has retail fuel sales or business dealings with associates that are not at market value.

If the trust carries on a business during the current income year and has an aggregated business turnover of less than $2 million under the aggregation rules discussed above, then the trust is a small business entity.

Business operated for only part of the year

If the trust carries on a business for only part of the income year, annual turnover must be worked out using a reasonable estimate of what the turnover would have been if the trust, or a relevant entity, had carried on a business for the whole of the income year.

Satisfying the aggregated turnover threshold

There are three ways (previous year turnover, estimate of current year turnover and actual current year turnover) to satisfy the $2 million aggregated turnover requirement, but most businesses will only need to consider the first method.

Previous year turnover

If the aggregated turnover of the trust for the previous income year was less than $2 million, it will be a small business entity for the current year.

This is regardless of its estimated or actual aggregated turnover for the current year.

Estimate of current year turnover

If the estimated aggregated turnover of the trust for the current income year is less than $2 million, it will be a small business entity for the current year.

If you are estimating your turnover, you need to assess whether you are more likely than not to have less than $2 million aggregated turnover as at the first day of the income year or, if you have started a business part way through the year, as at the time you started your business. You should estimate your turnover based on the conditions you are aware of at the beginning of the income year or, if you have started a business part way through the year, at the time that you started your business. Trusts that commenced carrying on a business in the current year need to calculate what their turnover would have been had the business been carried on for the entire year.

This method cannot be used if the aggregated turnover of the trust in each of the previous two income years was $2 million or more.

Actual current year turnover

If the actual aggregated turnover of the trust is less than $2 million as at the end of the income year, it will be a small business entity for that year. This method is only needed if the first two tests cannot be met.

If the trust is a small business entity by means of this method, it cannot use the GST and PAYG concessions for that income year, as those particular concessions must have been chosen earlier in the income year.

Former STS taxpayers

There are transitional rules for former STS taxpayers that deal with:

continued use of the STS accounting method

treatment of depreciating assets previously allocated to STS pools.

There is a special rule that applies if the trust is winding up a business this year that it previously carried on and it was an STS taxpayer in the income year it ceased business.

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.